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Surprise inflation figures

The latest figures were a surprise, only not in a good way. CPI annual inflation, which is the Government’s target measure, was 3.1% in August and unchanged compared to the previous month. General expectation in the City had been that the rate would continue to fall to around 2.9%.

There were several categories which produced strong upward pressure on prices. Air transport showed an increase in fares of 16.1% compared to a rise of 8.3% a year ago. The biggest contribution to this coming from long haul and European routes.

Clothing and footwear also rose by 2.8%, which is the largest rise between July and August since 2001.

There was also an increase in food prices where the largest upward effects came from bread and cereals and vegetables. Bread and cereal prices rose 1.2% between July and August compared to a fall of 1.0% a year ago. This is the biggest rise ever recorded between July and August in this category. Whilst vegetable prices actually fell between July and August this year the fall wasn’t as great as at the same time last year, and so this category also contributed to inflation.

The trend of the various measures can be seen in the Figure below.

Source: ONS

There were some downward pressure on prices, particularly a fall in the price of second-hand cars, and fuel and lubricants where there was a 1.0% fall.

Retail Prices Index (RPI) inflation slowed to 4.7% from 4.8% in July, although it had been expected to fall further. The RPI is often used as a basis for wage negotiations but with the austerity package in place and the continued squeeze on companies, many employees are going to see a fall in real wages this year.

We also need to bear in mind that the government is raising VAT to 20% in January next year and this will produce another upward pressure on consumer prices.

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Posted in Consumer Price Index, Inflation

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